What is economic order quantity (EOQ)?

Economic Order Quantity (EOQ) is the optimal order size that minimizes the total cost of inventory, which includes both ordering costs and holding costs. Ordering more frequently increases ordering costs while ordering in larger quantities increases holding costs. EOQ finds the balance point where the combined cost is lowest.

What is the EOQ formula?

The EOQ formula is: EOQ = square root of (2 x Annual Demand x Order Cost / Holding Cost per Unit per Year). Annual demand is total units needed per year. Order cost is the fixed cost per order placed. Holding cost is the annual cost to store one unit including storage, insurance, and opportunity cost of capital.

What are the assumptions of the EOQ model?

The EOQ model assumes that demand is constant and known, lead time is constant and known, orders are received all at once (no partial shipments), there are no quantity discounts, and the only variable costs are ordering and holding costs. In practice these assumptions are approximations, but the model still provides a useful starting point.

What is holding cost in EOQ?

Holding cost (also called carrying cost) is the total annual cost of storing one unit of inventory. It includes warehouse rent or space allocation, insurance, taxes on inventory, obsolescence and spoilage risk, and the opportunity cost of capital tied up in stock. Holding costs typically range from 20% to 30% of the inventory value per year.

What is ordering cost in EOQ?

Ordering cost is the fixed cost incurred each time a purchase order is placed, regardless of order size. It includes the administrative cost of creating and processing the order, receiving and inspection costs, shipping fees that are per-order rather than per-unit, and accounts payable processing. It does not include the cost of the goods themselves.

What are the limitations of EOQ?

EOQ assumes constant demand and lead time, which rarely holds in practice. It does not account for quantity discounts, seasonal demand, perishable goods, or storage capacity constraints. For products with highly variable demand, EOQ should be supplemented with safety stock calculations and adjusted periodically based on actual demand data.

How does EOQ relate to reorder point?

EOQ determines how many units to order while the reorder point determines when to place the order. When your inventory level drops to the reorder point, you place an order for the EOQ quantity. Together, these two values form a complete inventory management policy that balances ordering and holding costs while preventing stockouts.

When should I not use EOQ?

Avoid using EOQ for products with highly seasonal or unpredictable demand, perishable goods with short shelf lives, or items where the supplier offers significant quantity discounts. EOQ is also less useful when storage space is severely limited or when you have contractual obligations for fixed delivery schedules. In these cases, use demand-driven planning methods instead.

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EOQ Calculator

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Annual Demand — D (units)

Order Cost — S ($)

Holding Cost — H ($ per unit/year)

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What is Economic Order Quantity?

Economic Order Quantity (EOQ) is the ideal order size that minimizes the total cost of inventory management — specifically the combined cost of ordering and holding inventory. Ordering too frequently means high ordering costs; ordering too much at once means high holding costs. EOQ finds the sweet spot.

The EOQ Formula

The EOQ formula is EOQ = √(2DS / H), where:

D (Annual Demand) — The total number of units your business needs over a year. This should be based on historical sales data or demand forecasts.
S (Order Cost) — The fixed cost incurred each time you place a purchase order, including administrative time, shipping, and receiving costs.
H (Holding Cost) — The annual cost of holding one unit in inventory, including warehousing, insurance, depreciation, and opportunity cost of capital.

Assumptions and Limitations of EOQ

The classic EOQ model assumes constant and known demand, fixed order and holding costs, instantaneous replenishment (no lead time), and no quantity discounts. In practice, these assumptions rarely hold perfectly. However, EOQ remains a valuable starting point:

Demand variability — Real demand fluctuates. Combine EOQ with safety stock calculations to buffer against uncertainty.
Quantity discounts — Suppliers often offer price breaks at certain order volumes. You may want to order more than EOQ if the discount outweighs the extra holding cost.
Lead time — EOQ tells you how much to order, not when. Use it alongside reorder point calculations for a complete replenishment strategy.

How Nventory Helps

Nventory automatically calculates optimal order quantities for every SKU based on your actual demand patterns, supplier pricing tiers, and real holding costs. As your sales velocity changes, Nventory dynamically adjusts recommended order sizes — so you always order the right amount without manual recalculation. Combined with automated reorder point alerts, Nventory ensures your replenishment strategy is both cost-efficient and responsive to market conditions.

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EOQ Calculator

Your Inputs

Results

What is Economic Order Quantity?

The EOQ Formula

Assumptions and Limitations of EOQ

How Nventory Helps

Frequently Asked Questions

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Safety Stock Calculator

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